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Are Feds (and Veterans) Over-Allocated to the TSP G Fund?

The TSP recently released the results of its 3rd-party audit for Calendar Year 2013. While most of the findings are a snoozer, what continues to amaze me is that almost a majority of assets in the TSP are invested in the G Fund.

Don’t get me wrong- I love TSP, and I love the G Fund, but I think Federal Employee (and Uniformed Military) members putting almost half their investments in the G Fund is way too conservative. See the table below:

When you add it up (including the TSP Lifecycle funds) the G Fund takes the top spot, and adds up to more in assets than the next two funds (C- and S Funds) COMBINED. All-in, some 42% of TSP assets are invested in the G Fund:

Why do I think this is too conservative?

1) Look at the composition of the L 2050 fund– It has over 10% of its assets in G Fund. If you’re in your twenties right now, this is definitely way too conservative for your retirement asset mix, especially if you are using a Life Cycle fund from Schwab, Fidelity, or Vanguard. (Note, however, that the TSP’s G Fund is a unique creature in that it invests in longer-term Government securities, waves a magic wand, and turns them in to the equivalent of a money market fund for TSP participants). Still, there’s a danger of inflation whacking your long-term returns over the next 30 working years, even in an investment as superior as the G Fund.

2) Feds and retired veterans already have guaranteed money as a backstop- It’s called FERS Annuity (and/or your Military Retirement Check). If you’ve already earned a Government-Guaranteed, Fixed Annuity, with COLA/Inflation Rider, this is the Holy Grail of financial security. Almost nobody in the private sector has a defined benefit pension anymore, and even those chosen few do not have a pension 100% guaranteed by Uncle Sam. Knowing this, why would you do the equivalent of ‘stuffing money under the mattress’ in the G Fund?

3) For more reading, have a look at “Are you a Stock or Bond?” by Moshe Milevsky. He introduces the concept of ‘Human Capital’ and makes a convincing argument that Feds, Municipal Employees, and Tenured Professors should be Very aggressive with their financial investments.

It’s not that simple because we don’t have data on their other holdings. If you have a large IRA, spouse has a large 401k, inherited a substantial sum, have rental properties, or other scenarios, it might make sense to have the fixed income portion of your portfolio in G. For many people, you’re right, but not in all cases.

My holdings in the TSP skew the results similar to Steve. TSP is just a portion of my holdings, but I view the G fund as the best available fixed income investment available to me. My overall allocation is about 70% stocks and 30% fixed/bonds. However, most of my fixed income is in the G fund, so my TSP only allocation is 60% G fund and 40% stock funds. A good question is what percentage of feds have substantial assets outside the TSP, are their TSP only allocations significantly different than their overall allocation, and are there enough of these individuals to influence the results?

The folks in Congress who are attacking the G Fund use that “money market fund” analogy as well. However, G isn’t used as MM. Employees don’t withdraw money from it daily (in aggregate, yes; individually, no). They can’t use it as a MM checking account.

Much G remains in place for years. I still have some that I got in April 1987 when TSP started. It would be interesting to know the average length of time money has been in G when it’s withdrawn.

Had I been offered 30-year treasuries in TSP in 1987 at a little per pay period, I’d have bought them. G was the next best thing.

From my experience dealing with Soldiers and TSP, almost all of them are invested in the G fund because that’s automatically where they are started when they contribute allotments to TSP. Some were amazed that other funds existed, and a few of them told me they would go home immediately and move their allocation around to a riskier set including and S and I funds.

I’m in the same boat as Steve and K. I have a small TSP account and it is 100% invested in the G Fund, simply because it offers a very nice fixed income offering. The rest of my asset allocation includes a variety of stocks and bonds, currently sitting at roughly 70% stocks and other equities, 30% bonds and fixed income.

Treating separate smaller investment accounts as individual buckets is much easier than trying to maintain the correct asset allocation mix inside each account. I try to do most of my rebalancing inside my largest account, and I try to keep any smaller accounts in as few investments as possible. This makes rebalancing faster and easier.

Elly – Thanks for Reading – The G Fund is a unique animal (a unicorn) in that it provides the liquidity of a money-market fund with the returns of a 5-year CD.
If you look at Bankrate.com for today (as well as historicals) you can see G Fund tracks pretty closely with 5-year CD returns. So whenever 5-year CD rates get to 4% you will see the same in the G Fund.
Remember, when rates go UP, Bond Prices (and the value of the F Fund) FALL. But the G Fund has never had a bad day. So I like to have a portion of my investments in the G Fund, whether it is on its own or inside a TSP Lifecycle fund.